Fauji Fertiliser Bin Qasim Limited plant site is a modern granular urea and Di-Ammonium Phosphate (DAP) fertilisers manufacturing complex, built at a cost of US $468 million and located at Bin Qasim, Karachi, with Head Office at Harley Street, Rawalpindi.
Initially named as FFC-Jordan Fertiliser Company (FJFC) with FFC (30%), FF (10%) and JPMC (10%) as main sponsors, the company was formally listed on all the three stock exchanges in May 1996 and commercial production commenced from January 2000. However, it continued to run in crises due to technical, financial and managerial reasons till 2001.
DAP plant brought to suspension in 2001 due to accumulated loss of Rs 6.5 billion. It resumed production in September 2003, after a lapse of 2 years. It was renamed in 2003 as Fauji Fertiliser Bin Qasim Ltd. (FFBL), as the Jordan Phosphate Mines Co (JPMC) sold its entire equity in the company. Phosphoric acid supply agreement with Jordan also terminated accordingly. The company turned out to be profitable after 3 years and declared 'maiden dividend' in 2004. It surpassed the profit of the year 2004 in first nine months of 2005, ie, September 2005. The year 2005, so far has been the most profitable year of the company.
Fauji Fertiliser Bin Qasim Limited is a subsidiary of Fauji Fertiliser Company Limited catering to two of the unique products namely granular urea and DAP, having a total installed capacity of 1670mtpda and 1350mtpda respectively. Thus, it enjoys a huge growth potential in both segments. FFBL also uses the marketing and distribution network and brand name of "FFC Sona Urea" to sell its products. FFBL is the only fertiliser complex in Pakistan producing DAP fertiliser and granular urea thus making significant contribution towards agricultural growth of the country by meeting 31% demand of DAP and 13% of urea in domestic market.
In 2007, FFBL successfully completed ammonia plant BMR. In order to implement the same, plant operations remained suspended for nearly three months owing to ammonia compressor couplings damage and reformer refractory failure. Since then, ammonia plant has been running smoothly. After successful completion of DAP plant revamp in Mar 2008, an ever highest production of 2,309 tonnes per day was achieved on April 26, 2008 which is 171% of plant name capacity of 1,350 tonnes per day. Plant however, operated at a low load in May and June due to variation in composition of acid being supplied.
Production of ammonia at 226 thousand tonnes and urea at 334 thousand tonnes is higher by 80% and 112% respectively, over the corresponding period, whereas DAP production at 150 thousand tonnes is about the same level. FFBL, the sole DAP producer in the country, is the main beneficiary of elevated DAP prices. Any rise in DAP prices would likely to improve company's gross margins. FFBL's share in urea and DAP markets remained 13% and 23% respectively, during the period.
FFBL has 25% stake in the Pakistan Maroc Phosphore S.A (PMP) Company, which is a joint venture between OCP Group of Morocco and Fauji Group. OCP is one of largest producers of phosphoric acid in the world. The PMP project has been completed with a budgeted cost of 2.03 billion Moroccan dirhams. PMP shall meet the total phosphoric acid requirements of FFBL. Sulphuric acid and Phos acid production commenced on Mar 27, 08 and Apr 04, 08. Production of marketable phos acid ie 54% concentrated has also been started on Apr 08, 08. Since the commencement of commercial production, sulphuric acid and phos acid plants are operating satisfactorily and about 94 thousand tonnes of phos acid has been received at FFBL plant site.
The investment is likely to enhance FFBL's earnings in two ways: (I) expected dividend income from the PMP from next year, and (II) expected increase in FFBL's profitability from guaranteed long term supply of phosphoric acid for its DAP plant at comparatively lower rates than the international benchmark.
FERTILISER SECTORFertiliser industry continues to make significant contribution towards the agricultural economy, keeping the domestic prices substantially lower than the international prices. The industry provided a subsidy of Rs 100 billion to farmers for the nine months ended September 30, 2008. Fertiliser sector, overall, has shown an impressive performance in the 9-month period of current fiscal year. Net profitability of the fertiliser sector increased by 43 percent year-on-year basis and stood at Rs 9.276 billion as compared to Rs 6.480 billion earned in the same period last year (SPLY).
Net sales in the first 9-month period increased by 25.27 percent on yearly basis to Rs 52.685 billion as compared to Rs 42.054 billion in the SPLY. The main factor driving the growth rate was 20 percent growth in Urea sales, and high fertilizer prices ie, weighted average urea and DAP price/bag up by 23 percent and 153 percent respectively. These factors helped overcome the significant decline of 71 percent in DAP sales.
Urea production for the sector rose by an impressive 8.6 percent to 3.4 million tonnes, with a capacity utilisation standing at 114.3 percent up by 680 bps. DAP production also increased by 8.2 percent to 30,2000 tonnes. However, the cumulative financial cost for the sector rose by a significant 124 percent on yearly basis to Rs 3,974 million in this period against Rs 1,775 million in the SPLY. High carryover inventory increased the working capital requirements, which in addition to rising interest rates and currency translational losses fuelled the financial costs.
3QFY08 RESULTSOwing to enhanced use of urea, total urea sales of FFBL during the period were 524 thousand tonnes including 12 thousand tonnes of imported urea ie, 123% against target and 77% higher than the sales of corresponding period. DAP sales during the nine months were 58 thousand tonnes ie, an achievement of 22% against the target and 77% lower than the corresponding period, due to unprecedented hike in DAP price and ambiguity over subsidy by the GOP.
Company's share in Urea and DAP markets remained 13% and 23% respectively, as compared to 9% and 33% in the year 2007. The company earned a gross profit of Rs 2,849 million ie, Rs 149 million higher than Rs 2,700 million, earned during the same period last year.
The increase is mainly due to higher Urea sales during the period under review as the sales in the corresponding period were significantly low due to shutdown of plants for Ammonia BMR. However, due to substantial increase in production cost, in particular the DAP, owing to high price of phos acid, company's gross profit margin reduced by 3% during the period under review ie, 31% as compared to 34% in the corresponding period last year.
Although company's gross profit showed positive trend in the 9month period of the current fiscal year, FFBL's profit after taxation declined from Rs 1,545 million in the SPLY to Rs 544 million this year. Growth in gross profit was driven by 16 percent growth in sales in the nine-month period. However, net sales in the third quarter declined mainly due to shutdown of plants for Ammonia BMR.
FFBL's production cost on the other hand increased substantially by 22 percent mainly due to high price of phosporic acid. Company's profitability has been adversely affected by very high financial charges which increased from Rs 453 million to Rs 1,904 million showing a growth rate of 320 percent.
This includes Rs 1,025 million on account of foreign exchange loss over import of phosphoric acid mainly due to 30 percent devaluation of Pak Rupee against US dollar in the 9-month period under review. FFBL's financial cost also increased due to increased utilisation of working capital lines at high costs (Rs 16 billion approximately by 30th Sep, 08). This occurred mainly due to lower off-take of the product and delay in the receipt of DAP subsidy claim from GoP.
As a result, company's PAT declined by 65 percent in the 9 months period under review and EPS declined to Rs 0.58 against Rs 1.65 in the SPLY. On the other hand, DAP subsidy and wheat price support measures taken by GoP are likely to positively affect in the fourth quarter.
Ammonia BMR is expected to increase the urea production capacity by at least 15 percent, which will benefit the company in the fourth quarter. The balance sheet shows a huge increase in the inventory, which can be attributed to lower DAP sales, due to an unfavorable response to increased prices. Another extraordinary increase is witnessed in the other receivables - a result of delayed subsidy payments by the cash stricken government.
====================================================================
Recent Performance 3Q-08 3Q-07 Change
====================================================================
Amount in '000
====================================================================
Sales 9,078,504 7,825,704 16%
Cost of goods sold (6,229,377) (5,126,039) 22%
Gross profit 2,849,127 2,699,665 6%
Distribution Costs (1,083,499) (721,483) 50%
Administrative Expenses (149,257) (88,025) 70%
Operating Profit 1,616,371 1,890,157 -14%
Financial Charges (1,904,741) (453,528) 320%
Other expenses (25,579) (142,436) -82%
--------------------------------------------------------------------
other income
--------------------------------------------------------------------
compensation from GOP 600,000 600,000 -
others 483,554 461,939 5%
1,083,554 1,061,939 2%
Profit before Taxation 769,605 2,356,132 -67%
--------------------------------------------------------------------
Taxation
--------------------------------------------------------------------
Current
--------------------------------------------------------------------
Deferred (225,299) (811,108) -72%
Profit after taxation 544,306 1,545,024 -65%
Earnings Per Share 0.58 1.65 -65%
====================================================================
OPERATIONAL HIGHLIGHTS FY07During the year under review, FFBL achieved daily ammonia production of 1,575 MT ie, 124% on September 16, 2007. However, ammonia production at 362 KT, was 19% below the production of year 2006 and 8% below the target.
Granular urea production at 488 KT was 19% lower than last year and 12% below the target, whereas DAP production at 357 KT was 21% lower than the last year, achieving 9% over the target. Urea inventory stood at 22 KT, which was 12% lower compared to 25 KT inventory of year 2006. Similarly, DAP inventory at 9 KT was 125% higher as compared to 4KT closing inventory of December 2006.
Ammonia BMR project was implemented in two phases, Phase-I was executed in year 2006 and Phase-II during March-May 2007 turnaround, involving 62 foreign vendor service men (VSM) from different countries at a cost of 48.5 million euros. Ammonia production capacity has increased to 123%. DAP plant revamp was undertaken in 2007 wherein DAP plant capacity would be enhanced to 150% of its designed capacity. The company has recently completed its DAP revamp project, which has increased DAP plant capacity by 51.5% to 675k tpa from 446k tpa earlier. Feed gas subsidy as well as GOP compensation shall end in the year 2008. The effects of these events are being mitigated through the above mentioned capacity expansions.
The increased capacities will also cater, to a certain extent, for the increased fertilizer requirement of the country. Amendment to existing GSA was signed by SSGC and FFBL on December 15, 2007 after hectic efforts. As per revised agreement, required quantity of gas ie, 85 MMSCFD has been secured upto year 2015, extendable for further 10 years.
PAKISTAN MAROC PHOSPHORE S.A, MOROCCO (PMP): The project has entered the start up phase, to complete within 2030 million MAD (Moroccan dirham) as budgeted. On commissioning, this project will ensure uninterrupted supply of phosphoric acid (core raw material) for DAP plant, coupled with enhanced earnings in the form of dividend.
First off shore shipment of phosphoric acid is expected in March 2008, which will coincide with completion of FFBL's DAP plant de-bottlenecking already started from 10 December 2007. Foundation Power Company (Dharki) Limited (FPCDL): The project operations are likely to commence by 3rd quarter 2009.
Investment in Fauji Cement Company Limited (FCCL) expansion project cement industry has witnessed exceptionally higher growth in local consumption as well as in exports during the year ended June 2008. In order to benefit from the growing demand, plant's expansion is becoming lucrative option for the cement manufacturers.
Given the advantages of growing demand for cement and the diversification, the Company has decided to invest in this business. FFBL has invested an amount of Rs 300 million in this project to become a 2.8% ordinary shareholder, thereby adding to its earnings. FFBL is quite liquid in terms of paying its short-term debt.
Its current ratio is well above 1 and hovers around the industry average. However, due to the capacity expansion projects and Ammonia BMR (Balancing, Modernization, Revamping) project successive payment of long-term loan will follow in future.
Consequently it will hit the current liabilities of the company, gradually depressing its liquidity position. The partial effect has been reflected in the decline of CR in FY07. Further effect is going to persist in the next annual accounts as well owing to constant investment in BMRE, and expansion projects by the company. As a nascent company in early 2000, FFBL suffered major losses.
However, prudent strategies helped the company to emerge out of this deplorable condition, marking the relentless growth of the company from FY02 onwards. Further, the commencement of previously resumed DAP plant in 2003 increased the profit margins of the company by manifold.
FFBL sold 474KT of urea in addition to 19KT of the imported urea. During the year 2007, total urea sales of 493KT were 26% lower comparing 669 KT sales for the year 2006, thereby achieving 77% of the sales target. Company's share of Urea market remained at 10%. Sona DAP sales at 352 KT were 26% lower comparing 473 KT in the year 2006, thus meeting 110% of the sales target. DAP market share narrowed to 24.7% as compared to 31.1% in the last year.
Increased fuel/feed gas prices, greater product transportation cost and overall inflation contributed towards rise in urea sales price, consequently keeping the company at advantage. On the other hand rise in international DAP (which is mainly imported) prices and freight prices required FFBL to increase the prices of DAP as well. Coupled with the pricing mechanism was cheap availability of natural gas at subsidized rates (till 2009).
The combined effect is reflected in the company's soaring profit margins in FY05-FY07. Likewise, ROA and ROE have showed an increasing trend following recovery from accumulated losses and hovers around the industry average trend. Increase in KIBOR rates and cost of production might hit the bottom line and top line respectively, mitigating any advantage of high per unit sales price.
Though FFBL has a very favourable debt paying ability, it is still worse than the industry. Once the entire long-term loan has been paid off, the debt payment ratios will gradually increase to come at par with the industry. As can be inferred from the graph, long term debt is the main financing source for FFBL, which depicted a declining trend till FY06 but again rose in FY07 on account of extensive BMR and expansion projects.
As for the interest coverage ratio (TIE), the trend is worse than the preceding years. This may be attributed to the increasingly high finance cost, on account of tight monetary policy and further long-term loans acquired by the company. Once the GoP's compensation to FFBL expires, the company's debt management ratios are going to be effected adversely and may divert from the near to stable trajectory to a depressing one.
In consequent of expansion and enhanced capacity utilization, inventory level (spares, raw materials, packing material etc) increased by a large amount consequently hitting the inventory turnover and operating cycle of the company. As evident from its DSO, FFBL, however, has been efficient in converting its credit sales into cash.
As a result of striking growth in sales, asset turnover ratio and sales-to-equity ratio has been increasing depicting the company's efficiency in asset utilization as compared to the other players.
On the back of demand supply gap in the country, expansion projects and subsidized gas availability, higher urea and DAP prices, and recommencement of DAP production, FFBL has enjoyed a historically increasing trend in its EPS.
Owing to poor performance in the initial years of its inception, FFBL has no dividend payout history until FY04. In the foreseeable future, however, the company will be able to establish a strong dividend policy due to improved margins, though it would not be at par with the industry average trend. The book value share of the company is also favorable after its recovery from the accumulated losses at the time of setup.
FUTURE OUTLOOKThe profitability of fertiliser sector is directly linked with the performance of agriculture sector and volatility in the international prices of required inputs. Over the last couple of years, domestic demand of fertilizer products have been particularly altered due to adverse price mechanisms of inputs witnessed in the international market.
Constant rise in international prices of DAP have put downward pressure on DAP's domestic demand and subsequent increase in urea's demand. As far government's position is concerned, measures definitely have been taken, for example, better support prices, increased availability of water and elimination of GST on imported Urea and reduction on duty on agricultural tractors from 20 percent to 15 percent.
Domestic production of urea was able to support till October 08. Additional imports of about 450k tons would be required to shed off any shortage during November 08 to January 09 period on wheat crop in the Rabi season.
Pakistan has already started importing urea from Saudi Arabia. Going forward, higher urea demand in the wake of shift from DAP to urea, and shortage would definitely drive urea's prices upward in the domestic market.
DAP's projected off-take of the DAP is 850k tons as against the 985k tons of availability, thus DAP's situation is satisfactory. However, DAP's demand is likely to show positive trend in the near future. This is expected in the wake of decreasing international prices to $900/Mt in September and DAP subsidy fixed at Rs 2,200/bag.
FFBL's profitability was badly hit by the increasing financial cost owning to loss on foreign exchange due to devaluation of Pak rupee against the US dollar. Similarly, in the wake of increasing discount rate, liquidity position in the inter-market has worsened which is increasing the cost of borrowing. This is indirectly affecting the corporate sector's profitability through increased of financing.
===============================================================================================================
FAUJI FERTILIZER BIN QASIM LIMITED (FFBL)
===============================================================================================================
Income Statement ('000) Dec'02 Dec'03 Dec'04 Dec'05 Dec'06 Dec'07
---------------------------------------------------------------------------------------------------------------
Sales 3,964,326 5,166,515 11,462,410 14,254,764 14,707,288 12,242,888
Cost of goods sold -2,915,053 -4,002,866 -8,201,623 -9,692,236 -10,023,044 -7,420,310
Gross profit 1,049,273 1,163,649 3,260,787 4,562,528 4,684,244 4,822,578
Administration and General Expense. 74,706 84,730 90,653 114,470 103,643 131,369
Selling and Distribution Expenses 523,570 580,286 931,066 1,257,698 1,420,401 1,068,629
Other Operating Expenses 8,850 19,970 113,686 169,746 243,074 -
Total Operating Expenses 607,126 684,986 1,135,405 1,541,914 1,767,118 1,199,998
---------------------------------------------------------------------------------------------------------------
Other Operating Income:
---------------------------------------------------------------------------------------------------------------
Compensation from the Govemmen 1,000,000 700,000 700,000 700,000 700,000 600,000
Others 48,145 43,401 107,688 454,123 552,158 651,675
Operating Profit (EBIT) 1,490,292 1,222,064 2,933,070 4,174,737 4,169,284 4,874,255
Financial Charges 338,465 156,705 84,817 259,817 412,370 630,513
other expenses 343,813
Profit before Taxation 1,151,827 1,065,359 2,848,253 3,914,920 3,756,914 3,899,929
Provision for Taxation 979,040 135,641 -1,017,161 -1,465,811 -1,312,056 -1,359,896
Net Profit after Taxation 2,130,867 929,718 1,831,092 2,449,109 2,444,858 2,540,033
---------------------------------------------------------------------------------------------------------------
FINANCIAL RATIOS
---------------------------------------------------------------------------------------------------------------
PROFITABILITY Dec'02 Dec'03 Dec'04 Dec'05 Dec'06 Dec'07
---------------------------------------------------------------------------------------------------------------
Gross Profit Margin 26.47% 22.52% 28.45% 32.01% 31.85% 39.39%
Profit margin 53.75% 18.00% 15.97% 17.18% 16.62% 20.75%
Return on Asset 11.37% 4.80% 8.34% 9.96% 8.83% 8.74%
Return on Common Equity 55.98% 15.48% 25.62% 31 .69% 28.64% 29.85%
---------------------------------------------------------------------------------------------------------------
LIQUIDITY RATIO Dec'02 Dec'03 Dec'04 Dec'05 Dec'06 Dec'07
---------------------------------------------------------------------------------------------------------------
Current Ratio 0.84 1.62 1.53 1.46 1.34 1.17
---------------------------------------------------------------------------------------------------------------
ASSET MANAGEMENT Dec'02 Dec'03 Dec'04 Dec'05 Dec'06 Dec'07
---------------------------------------------------------------------------------------------------------------
Inventory Turnover 54.09 46.37 24.27 40.41 39.11 54.53
Day Sales Outstanding (DSO) 58.57 27.34 13.54 2.91 5.66 7.17
Operating Cycle 112.66 73.71 37.81 43:31 44.77 61.70
Total Asset Turnover 0.21 0.27 0.52 0.58 0.53 0.42
Sales/Equity 1.04 0.86 1.60 1.84 1.72 1.44
---------------------------------------------------------------------------------------------------------------
DEBT MANAGEMENT Dec'02 Dec'03 Dec'04 Dec'05 Dec'06 Dec'07
---------------------------------------------------------------------------------------------------------------
Debt to Asset(%) 79.69 68.98 67.47 68.56 69.16 70.71
Debt/Equity 3.92 2.22 2.07 2.18 2.24 2.41
Times Interest Earned 4.40 7.80 34.58 16.07 10.11 7.73
Long Term Debt to Equity (%) 335.94 191.79 144.06 136:00 125.49 128.89
---------------------------------------------------------------------------------------------------------------
MARKET VALUE Dec'02 Dec'03 Dec'04 Dec'05 Dec'06 Dec'07
---------------------------------------------------------------------------------------------------------------
Earning pershare 3.90 1.31 1.98 2.62 2.62 2.72
Dividend per share 0.00 0.00 1.00 2.00 1.25 1
Book VaIue 4.70 6.60 7.65 8.27 9.14 9.11
Market prices(on Dec 30) 9.55 17.60 30.60 38.15 28.30 42.05
Price Earning Ratio (Times) 2.45 13.44 15.45 14.56 10.80 15.46
Number of shares issued 809,901 909,901 934,110 934,110 934,110 934,110
===============================================================================================================